TE, a possible revised tax code and more swollen deficit
Sep 9th 2004 | WASHINGTON, DC
From The Economist print edition
George Bush's economic agenda is full of bold ideas, but it does not add up
FOR the past four years George Bush's economic strategy has consisted of one idea: tax cuts. Whether the economy was growing or in recession, the budget in surplus or deficit, Mr Bush's prescription remained the same. While the White House developed a bold new vision for America's role in the world, economic policy boiled down to ad hoc justifications for more tax cuts.
This changed last week. In his speech to the Republican convention in New York, the president came much closer than before to articulating a coherent economic vision. It was an ambitious one too. It purported to define the proper role of government in the modern economy. To prosper, Mr Bush argued, America had to be the best place in the world to do business; and Americans must be equipped to deal with an economy where people change jobs frequently.
That, he said, required reforms to basic economic institutions: the tax code, health coverage, pensions. It meant creating an “ownership society” where people could prepare for retirement and meet their medical costs with individual accounts. It required a busy government. “Government should help people improve their lives, not try to run their lives,” Mr Bush intoned.
This is far from the government-is-the-problem rhetoric that Republicans have touted for years. Great chunks of Mr Bush's economic vision sound more like Bill Clinton than Ronald Reagan. In his convention speech in 1992, Mr Clinton talked of a government that “expands opportunity, not bureaucracy”, a government that helps people succeed in a changing economy.
Mr Bush did more than steal the New Democrat rhetoric. He also copied Mr Clinton's strategy of using myriad small initiatives to show his desire to help Americans succeed. Mr Bush's speech (with accompanying details on his website) offered a slew of voter-friendly policies. There were plans to double the number of people in job training, increase money for community colleges, put a health centre in every poor county and begin a “Cover the Kids” campaign to extend health-care coverage to more poor children. Mr Bush pledged to increase Pell grants, which help the poor to pay for college. And he promised to make workplaces friendlier to families, by pushing for “comp time” and “flex time”.
But if half his vision was Clintonomic, the other half was more straightforwardly conservative. Tax cuts were still to the fore. “My plan will encourage investment...by restraining federal spending, reducing regulation, and making the tax relief permanent,” Mr Bush promised. Goals that many conservatives value even more highly—tax reform and pension privatisation—also got a mention. Mr Bush promised to lead a bipartisan commission to reform the tax code, to make the system simpler, fairer and more pro-growth. And he repeated his pledge from 2000 that younger workers should be allowed to divert some of their payroll taxes into individual retirement accounts (though there was no more detail on this than there was four years ago).
Just what does it all add up to? Even conservatives disagree. David Brooks of the New York Times saw it as a transformational speech that broadened “compassionate conservatism” into a new governing philosophy. Others saw only blatant vote-buying. Bruce Bartlett, a conservative economic analyst, argued that Bush's agenda boiled down to “spend money on whatever you think will buy you a vote.” He predicted a Republican civil war after November 2nd.
The new “agenda” was certainly designed for maximum short-term political appeal: red meat for the conservative faithful coupled with promises of help for the squeezed middle class. The economy is one area where John Kerry generally still does better than Mr Bush in the polls. And the jobs situation is far from rosy. The Labour Department reported on September 3rd that 144,000 new jobs were created in August, much better than in June and July but hardly proof of a roaring job market. Mr Bush's speech was designed to protect his vulnerable domestic flank.
Unfortunately, this short-term appeal came at the expense of consistency and credibility. For all the ambitious rhetoric, Mr Bush's agenda is self-contradictory. He pledged to restrain government spending, yet proposed a slew of new government programmes. He called for making the tax code simpler and fairer, yet he wants to make permanent his tax cuts which have dramatically complicated America's tax system. (In Mr Bush's first term the tax code has grown by 10,000 pages.)
Worse, the agenda failed to acknowledge America's fiscal predicament: a large budget deficit and the looming retirement of the baby-boomers. Junking any pretence of fiscal responsibility, Mr Bush failed to mention the budget deficit. The Bush-Cheney campaign says that its new spending proposals (excluding Social-Security reform) cost only $7.5 billion a year. The Bush people also claim, to widespread incredulity, that the deficit will be halved by 2008.
New figures released on September 7th by the Congressional Budget Office, Washington's independent budget watchdog, show just how reckless this nonchalance is. This year's deficit, at $422 billion or 3.6% of GDP, is marginally lower than the CBO estimated six months ago. But the outlook for the next ten years has worsened, to a cumulative deficit of $2.3 trillion.
Mr Bush's aides point out that this number includes improbably high estimates for military spending (by law, the CBO must take this year's large defence bill as its basis). Assume a slowdown in military spending and the deficit falls to $1.3 trillion over the decade (see chart above). But if Mr Bush's tax cuts are extended (as he pledges), then the deficit rises by more than $2 trillion. And that still does not include the cost of fixing the Alternative Minimum Tax. This was introduced in the 1970s to limit tax avoidance by rich Americans claiming deductions. Now it is clobbering ever more ordinary Americans. Around 3m people currently pay the AMT; by 2010, 30m will. Fixing the AMT to stop this expansion would add another $600 billion to the ten-year deficit.
Mr Bush's refusal to acknowledge any fiscal constraints means that, despite the bold ideas in his speech, it is hard to say what a second Bush term might really bring. Most policy wonks guess that tax reform will be a big issue, if only because the AMT mess will force more changes to the tax code. But what does Mr Bush mean by tax reform? Kevin Hassett of the American Enterprise Institute sees the possibility of “1986 Redux”, when Mr Reagan pushed through a base-broadening, rate-reducing reform in his second term. Others worry that tax reform may involve no more than simplifying procedures so that millions of Americans no longer have to file tax returns. The truth is that no one—including Mr Bush—appears to know. |
